The AI Demand Bubble with Ed Elson

In this week's Better Offline, Ed is joined by Prof G Markets’ Ed Elson to talk about the recent slew of tech earnings, how analyst estimates show that 70% of Microsoft, Google and Amazon’s AI revenues come from OpenAI and Anthropic, and the logical endpoint of his AI bubble thesis. Save $10 off a year of my premium newsletter: https://edzitronswheresyouredatghostio.outpost.pub/public/promo-subscription/gzqwkv54e1 - I’d be so grateful! Ed Elson’s Newsletter: simplyput.profgmedia.com https://www.omnycontent.com/d/playlist/e73c998e-6e60-432f-8610-ae210140c5b1/cf0c25ad-cf01-4da5-ae1c-b0fc015f790e/53ed270b-7147-4f70-81c2-b0fc015fe4ed/simplyput.profgmedia.com Ed Elson’s Twitter: x.com/edels0n https://www.omnycontent.com/d/playlist/e73c998e-6e60-432f-8610-ae210140c5b1/cf0c25ad-cf01-4da5-ae1c-b0fc015f790e/53ed270b-7147-4f70-81c2-b0fc015fe4ed/x.com/edels0n Ed Elson’s Show: youtube.com/@ProfGMarkets https://www.omnycontent.com/d/playlist/e73c998e-6e60-432f-8610-ae210140c5b1/cf0c25ad-cf01-4da5-ae1c-b0fc015f790e/53ed270b-7147-4f70-81c2-b0fc015fe4ed/youtube.com/@ProfGMarkets YOU CAN NOW BUY BETTER OFFLINE MERCH! go to https://cottonbureau.com/people/better-offline use FREE99 for free shipping on orders of $99 or more. --- LINKS: https://www.tinyurl.com/betterofflinelinks Newsletter: https://www.wheresyoured.at/ Reddit: https://www.reddit.com/r/BetterOffline/ Discord: chat.wheresyoured.at https://discord.com/invite/QUUQUP9szv Ed's Socials: https://twitter.com/edzitron https://www.instagram.com/edzitron https://bsky.app/profile/edzitron.com https://www.threads.net/@edzitron Email Me: [email protected] mailto:[email protected] See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

• 0:00Speaker 00

  This is an iHeart Podcast. Guaranteed Human. My name is Jessa. One of the things I love the most about working for United Healthcare is that everybody matters. Every moment matters. There's a person behind every problem. I care because it's what I was put on this earth to do.

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• 2:47Speaker 06

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• 2:51Speaker 07

  Greetings and salutations. It's me, Ed Zitron, and it's Better Offline.

• 3:06Speaker 07

  That's right. We are back with Prof G Markets' Ed Elson, and we're here to talk about the naughty little buggers in the magnificent seven, primarily the big four, but really the big three, the Amazons, the Googles, and the Microsofts of the world. Ed, thank you for joining me again.

• 3:21Speaker 08

  Thank you so much for having me. I'm very, very excited to be here.

• 3:24Speaker 07

  Yeah, so tell me, they just reported earnings and, as you well know from the conversation we just had, I got some points to make about it, but why don't you run me through how they did on their earnings?

• 3:36Speaker 08

  Absolutely. So let's just run through what we learned on Microsoft's end. We saw pretty good growth, $90 billion in revenue, up 18%. Amazon, similar story, $200 billion in revenue, up 20%. Meta's revenue increased 28%. I mean, on its surface, this was pretty good. Just look at the numbers, even the net income, which exploded for many of these companies. But of course, that's not really what matters here. What really matters is how is the AI trade actually working out? There are two main questions that we really want to understand when we look at these big tech companies.

• 4:18Speaker 08

  The first question is, how much revenue did you generate from your AI business specifically? That's what we really want to know the answer to. And then the second question is, how much of that revenue came from two relatively unstable companies financially, specifically OpenAI and Anthropic? Those are the two questions I want to know the answer to. I know you want to know the answer to. We didn't get those answers. They didn't really tell us. And what they did tell us was not very helpful kind of papering over the reality, which makes you think maybe the reality is something that they don't really want us to see.

• 4:57Speaker 07

  So that's the funny thing as well. Like, before we get to the meat of what you and I both know we're going to discuss, there was also these weird massive equity gains. So the net income part of earnings is now not super useful because in all three cases of Amazon, Google, and Microsoft, they all posted massive equity returns based on the increasing value of OpenAI and their shares of either or both OpenAI and Anthropic, right?

• 5:24Speaker 08

  Yes. Yeah, a wrinkle in there that I'll address, but we'll start with Amazon and Google. The answer to that question is yes. Amazon's net income, so their earnings, exploded 245%. That's crazy growth, more than tripled. Google's exploded 298%. Again, crazy growth. How did that happen? What's going so right?

• 5:46Speaker 07

  What could possibly?

• 5:47Speaker 08

  Dig into it. Exactly. The answer in Amazon's case is that 85% of their net income came from unrealized gains in their stakes in Anthropic and OpenAI. So essentially, they basically looked at that company. They said, okay, I guess it's worth this amount of money. I guess it's worth a trillion dollars. And they marked that up, and then that was reflected in their earnings. And then in Google's case, 87% of their earnings came from their unrealized gains in their stakes in Anthropic and SpaceX. So those earnings of those companies, you can't really take seriously because they're not reflecting the fundamental underlying health of the business.

• 6:27Speaker 08

  They're reflecting the optimism associated with the valuations of these AI startups and these frontier labs. So that's the first problem, is the earnings themselves are not really reliable. In Amazon and Google's case, we'll get to Microsoft in a second. The other problem is that that then funnels down into how we value companies. Specifically, one of the most important valuation metrics in investing is the price-to-earnings multiple. That is how we figure out how expensive or cheap a company really is. We look at their earnings, then we look at the price of the stock, and we compare if the two match up. Now, as of the end of last week, which is when I did this analysis, Amazon was trading at 19 times earnings.

• 7:12Speaker 08

  Google was trading at 17 times earnings. The S&P, the overall market, currently trades at around 25 times earnings. So if you were to look at those multiples on Amazon and Google, you'd say, oh my gosh, these companies are crazy cheap. It is time to buy. But of course, we know that actually no, those multiples have been massively skewed and compromised, again, by those unrealized gains, by those paper gains.

• 7:37Speaker 07

  And just to be clear, earning, like, that comparison is always based on net income?

• 7:42Speaker 08

  Yes, it's based on, net income is equivalent to earnings. So we look at their PE multiple, and they're way down. I mean, you look at last year, Amazon was trading throughout the year at around 32 times earnings. Google was trading around 31 times earnings. So you look at 19 and 17, you go, oh my gosh, what's happened? They're so cheap. They're really cheap right now. That's not the case. So what we have to do, if you want to actually get an understanding of how to value these companies, is you need to subtract out the gains that they have registered in OpenAI, Anthropic, and SpaceX. You need to create basically a new metric. And we did that. And we found that the true multiple for Amazon, when you adjust for that, is actually 30 times earnings,

• 8:24Speaker 08

  and for Google, it's 31 times earnings. So no, these stocks are not cheap right now. Now, a lot of people will say, well, are you factoring in the fact that maybe there is some value in those companies, and did you put that in the numerator? Blah, blah, blah. There are a lot of, you know, nitty-gritty things that we need to do. And the answer is no, we didn't. But that's the kind of analysis that Wall Street needs to be employing right now. And the trouble is, the more that we see these stakes in these little AI startups and these businesses, and the more that it starts to skew the actual earnings of the companies, it makes it a lot more difficult for us to actually value which companies are cheap, which companies are expensive. And of course, it is in that complexification and in that obscurity

• 9:09Speaker 08

  that bubbles arise. This is the problem that we saw in the financial crisis. It's the problem that you and I have addressed when it comes to the data center SPVs. It's not necessarily that the SPVs are illegal. The problem is that they are hard to track, they're opaque, they're not reflected on the balance sheets of these companies, which means that Wall Street and the underwriters and the investors, when they look at the data, they're not looking at data that really tells them the reality of what is going on. So that is the problem with the earnings. That's the problem with the PE multiple. I will pause there, and we will get to Microsoft, which actually didn't have to report an increase in their earnings due to their stake.

• 9:51Speaker 07

  They had an Anthropic bit that did that, a $3.2 billion gain there.

• 9:55Speaker 08

  Sorry, yes, they did do Anthropic. But when you look at, I mean, Anthropic is a smaller investment for Microsoft. Their big investment is, of course, OpenAI, which did not show up in their net income. Their net income rose by about 30%. If we were to look at the OpenAI stake, you would think that it would explode by around 300%, like Google's earnings exploded. That didn't happen due to an interesting GAAP accounting principle, which I can get into in a moment, if you'd like me to do it now.

• 10:28Speaker 07

  Why not? Go on, why not go into it?

• 10:30Speaker 08

  All right. So why didn't Microsoft's net income explode?

• 10:35Speaker 08

  Uh, why wasn't their stake in OpenAI reflected in their earnings? And the answer is that their investment in OpenAI is so significant that because of stupid accounting laws and GAAP principles, they are required to report that that stake differently. So instead of reporting the alleged value of OpenAI in their earnings, instead, what they have to do, because their stake is so large, and so I guess the law says you need to report this differently. Instead, what they have to do is they have to report their share in OpenAI's profits. But of course, OpenAI has no profits. So that's actually why Microsoft had to take a $600 million hit on their earnings

• 11:19Speaker 08

  to reflect their share of OpenAI's losses in the second quarter, in the second quarter. So in a funny way, when accounting laws require you to report your AI investments correctly, it actually reveals that these big tech companies are actually losing money from AI. But when the accounting laws are loose and they're flimsy, it allows them to say, oh, I made money on this stuff. So it's it's an interesting wrinkle there. And yes, their Anthropic stake, they were able to kind of BS that in their earnings, but they weren't able to do it with OpenAI, which is why they took that $600 million hit. If we just play this out over the next quarter and the following quarter, what we can start to see is that actually these investments are are not as sexy

• 12:03Speaker 08

  as the as the net incomes on Amazon and Google would make them seem.

• 12:08Speaker 07

  And the other thing with Microsoft that I found interesting, and I'm a curious little critter, so I went and looked. They mentioned they had annualized revenue of, sorry, annualized run rate for AI in Q3 fiscal 27, uh, 26, which was last quarter. Just for the listeners, their fiscal year begins on July 1st of the year beforehand. So July, their fiscal year 26 begun July 1st, 2025. It's annoying, but their last quarter, they said, oh, we're here 37 billion run rate for AI. And in this quarter, they didn't.

• 12:37Speaker 08

  Right.

• 12:38Speaker 07

  They they just didn't mention it. And I think what it is, is the, it, I don't know, Ben, Ben from the Ben and Emile Show once said this, but it's like the the way to understand the stock market is imagine the thing that would piss you off the most happening. So there you go. Because it's so frustrating seeing everyone saying the AI bet paid off, the AI bet paid off, look, number go up so big, even though they gave us less information this time. They are obfuscating the information.

• 13:08Speaker 08

  Yes, exactly. If AI were going as well as a lot of people say it's going, then you would expect these companies to simply report their AI revenues and brag about it. But instead, they don't do that. Instead, what they do is they they report their compute revenue, which to be fair is growing, but that was a businesses, business that existed long before AI. That's not their AI revenue. And when they do report their AI revenues, they usually report it in ARR, their annual revenue run rate.

• 13:37Speaker 07

  And Amazon actually did that in this quarter and said it had a $25 billion run rate, which is $2.08 billion. But here's the other thing that people seem to miss as well. You know what also happened in this quarter? Anthropic's compute spend accelerated because its revenue, its revenue accelerated. Like, it's a very obvious, like, between, so this quarter would refer to what's it's June, May, April, right? Yeah, that is, that's when Anthropic, I think, claimed they hit 30 billion annualized run rate. Like, they are spending so much more in compute than their actual revenue. I wouldn't be surprised, and this we'll get into, if most of this run rate came from Anthropic and OpenAI spend. But again, jingle, jingle, the keys are here.

• 14:22Speaker 07

  Look at the run rate.

• 14:25Speaker 08

  Look at it. Exactly. And I think just just for, just for your audience to understand why run rate is a bullshit metric. I mean, this is sort of like, this is the classic

• 14:35Speaker 08

  metric that is reported by startups where their their revenue is very choppy. And so what they'll do is they'll pick their best month. And then they'll just times it by 12 and say, this is how much we are expected to make over the course of the year. I'll just like point out with my business, you know, my podcast generated double the revenue in June that it generated in May. We had a really good June. Now, I could just annualize that number. I could just times it by 12 and say, oh, that's how much money we're going to make this year. But of course, that would be BS, and I'm not going to do that to you. I'm not going to lie to you. But this is what they are resorting to. Instead of just reporting how much money they actually made off of AI, instead, what they do is they pick a random month. And then they say, oh, if we times it by 12, then that will be a good number.

• 15:20Speaker 08

  And that's what they are starting to report. It's very, um.

• 15:24Speaker 07

  But that was the one that my.

• 15:25Speaker 08

  BSy, yeah.

• 15:26Speaker 07

  It is, and that's the one that Microsoft declined to report this month, which means likely that, so I, the thing is, I I'm guessing that they're referring to a month within the quarter, but we actually don't know. We don't know if it's 30 days, 28 days. We don't know if it's four weeks times 50. But I, we truly don't know. Or it'd be like four weeks times 13. It's just, they never disclose this. But I think it's just a failure of the media and analysts on this one. Because I feel like if these companies felt any pressure to actually be honest with their investors, they, I don't know, would do anything other than this.

• 16:02Speaker 08

  Yes. Well, I think it's actually interesting. Meta is an interesting example of this. Meta is one of the few companies where the analysts are actually trying to ask management the tough questions because the, it is so obvious what the problem is. The the problem is that their, that their free cash flow is declining. It's down 91%. And the reason that it's declining is because they're spending just gargantuan amounts of money on this AI infrastructure. Now, for the other companies who are doing that, they already have these cloud businesses like Google Cloud, like AWS, like Microsoft Azure. And so Wall Street kind of understands generally how they are expected to generate a return on building all of those data centers.

• 16:46Speaker 08

  Wall Street can stomach that. With Meta, it hasn't been outlined whatsoever. You and I talked about this. They later kind of folded and admitted that they were just going to build their own cloud business. That was what we thought was going to happen. But when the analysts asked Mark Zuckerberg point blank what the actual plan was in terms of ROI, how are you actually going to generate a return on all of this AI data center spending? He didn't give them an answer. He didn't discuss the cloud plans. He didn't address any of the reports about how Meta was in early talks to sell compute to Anthropic, which I know you have covered at length. He basically just avoided the question.

• 17:26Speaker 08

  And I think that tells you something about Mark Zuckerberg and the extent to which he gives a shit. He doesn't really.

• 17:34Speaker 07

  He can't be fired. He literally cannot be fired.

• 17:37Speaker 08

  That's right.

• 17:38Speaker 07

  Which is.

• 17:39Speaker 08

  And that goes back to the governance. Exactly.

• 17:41Speaker 07

  I mean, it feels like we're in the golden age of grift. Like, it feels like we're just in an era where the only reason this is happening is because they know they can get away with it. There's no, it's not like, I've read multiple, I would say like five different articles on Meta, Google, Microsoft, Amazon, and their earnings. And the only reason anyone is slightly critical of Meta is because their revenue growth wasn't as good as it as it was expected to be. That's the only reason. It's not, it's not like analysts are point blank saying, hey, you haven't told us what your AI strategy is. You may have wasted, they're not being blunt with them. They're just like, hey, hey, Mark, when you get around to it,

• 18:26Speaker 07

  would you mind telling me why you spend like, like 200, 300 billion dollars? And you want to spend 145 billion dollars this year? When you, when you got a minute? Don't worry, I know you're busy.

• 18:37Speaker 08

  I actually disagree with you on that. I think Meta is the only company. I think, I think that this has been recognized by the market, by Wall Street. Took them a while, I'll, I'll give you that. But I think that in the case of Meta, they actually are starting to ask those questions. And I think the problem is that the other companies, because they have those cloud businesses, they're kind of refusing to ask the tough question, or not even the tough question, the obvious question of to what extent are you dependent on OpenAI and Anthropic, two companies which are losing gargantuan amounts of money, two of the most unprofitable companies in the history of companies. And that's literally a fact. You can look up the list of the most unprofitable companies ever,

• 19:20Speaker 08

  and you'll notice if you do the math, OpenAI and Anthropic should be in that list. So I think that they are not doing that homework, that hard work of digging into the numbers and asking that difficult question when it comes to, especially when it comes to Google and especially when it comes to Amazon. But I do think that they are worried about Meta's total lack of interest in laying out how they plan to generate any returns on this whatsoever.

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• 21:41Speaker 00

  My name is Jessa. One of the things I love the most about working for United Healthcare is that everybody matters. Every moment matters. There's a person behind every problem. I care because it's what I was put on this earth to do.

• 21:57Speaker 01

  I'm Ben and I work at United Healthcare. I am just one piece of a larger puzzle, but every piece matters. It's more than just work. We want to make the healthcare system better for everyone. I care because I want to make a difference. That's what committed to care means to me.

• 22:15Speaker 07

  Well, that's the thing though, I will push back again on Meta. Sure, they are asking the questions.

• 22:21Speaker 08

  Yeah.

• 22:21Speaker 07

  But they're not point blank saying, hey, you've not shown it. They're not, and even the media, the media is absolutely not. Like they're saying, oh, there's concerns over AI spend being higher than usual. That's strange. It's this kind of like plodding, oh, I guess maybe we should find something out. And the analysts are pushing these questions now. But as we speak, and in two days this will come out, so who knows, it'll be down again. But Meta's already recovered 6% today. It recovered a couple of percent. It's already on course to recover all of the losses.

• 22:57Speaker 08

  Yeah.

• 22:58Speaker 07

  So it's not like anything changed. But as, as we discussed before we got on here, there are some analysts who have tried to work out or have estimated the actual concentration of revenue for Amazon, Google and Microsoft for OpenAI and Anthropic spend. And as we were just discussing, so Ross Sandler over at Barclays, he estimates that 73% of all Amazon's AI revenues in both 2026 and 2027 will be Anthropic and OpenAI's compute spend. Just completely.

• 23:29Speaker 08

  Crazy number.

• 23:30Speaker 07

  Insane, it is insane. So I found this a couple of days ago, I'd been working on it. And I thought, well, it can't be that bad elsewhere. Except I looked at UBS's Stephen Jewes, he said this back in, so Barclays is back in March. Stevens was in June and he said that 40, sorry, it's 27% of all Google Cloud revenues, so not AI revenues, all Google Cloud revenues for 2026 are estimated to be OpenAI and Anthropic. And then 44% in 2027. That is completely fucking insane. Like that is just, this is, this is to me such a huge scandal.

• 24:10Speaker 07

  And I mean, I could also mention that, well, that there's also a Wells Fargo report that says that Microsoft's same deal, 73% is Anthropic and OpenAI of their AI revenues. Michael Turan over there. And it's like, I feel like I'm going a little insane because when you read these numbers, you're like, oh, these are from major investment analysts. How are they not calling like, hey, Mr. Fargo? Mr. Fargo, I read these numbers and you should really check these out because we might be in trouble. And I think, and friend of the showcase Kagawa really helped me nail this down. I think it's, these people are only capable of thinking two quarters in the future.

• 24:50Speaker 07

  Like they can, they can think of 2028, they could think of 2027, but they can only do so in terms of the last two quarters. Number has gone up. OpenAI and Anthropic are still solvent, so number will keep going up. It isn't a problem that the revenue is centralised because number keep going up. But to me, this is potentially one of the largest corporate scandals in tech history. And maybe I'm being dramatic, but this is, we're talking over $990 billion of capex now. And most of it is for these two companies that can quite literally not afford to pay unless one of those three companies gives them the money.

• 25:30Speaker 08

  Yes. This is a huge, huge problem. And you were saying that the analysts weren't, and the media weren't doing their job in terms of asking Meta questions about how they're going to generate a return. I sort of pushed back on you. On this one, the silence is deafening from the analysts and from the media. There is a very, very obvious concern when it comes to the businesses of the largest and most systemic companies in the world. The companies on which the portfolios of every American are entirely predicated on, on which the entire stock market relies on. And that is how much of your business depends on two companies, OpenAI and Anthropic.

• 26:14Speaker 08

  And you are one of the few people who has been doing significant work into uncovering that answer. And you have looked into some of the research that has come out of Wells Fargo, Barclays, UBS. And we should give those analysts credit for crunching those numbers and doing the hard work of figuring it out. But the numbers are insane. OpenAI and Anthropic, 74% of Microsoft's AI revenue. That is very, very unsustainable. We talked about diversification in markets, the importance of having a diversified portfolio. The same thing goes for business. You want to have a diversified revenue streams. That indicates strong, healthy, sustainable growth.

• 26:57Speaker 08

  None of these big tech companies have anything close to diversified revenue streams when it comes to AI. And so you have to ask the very obvious question, what would happen if one of those two companies, OpenAI and Anthropic, went under? And you also have to ask the question, what is the likelihood that one of those two companies, OpenAI and Anthropic, could go under? What is the likelihood that they would not be able to make good on those payments that are propping up the growth of these big tech companies, specifically when it comes to their revenue? And the answer is, it's actually pretty fucking high.

• 27:33Speaker 07

  Yeah.

• 27:33Speaker 08

  Because you look at the financials and they are ugly, as you've talked about at length. And we can get into, but I want to pass it back to you.

• 27:40Speaker 07

  No, the thing is, a fun story, a couple of days ago, Amazon, they were meant to give OpenAI another $35 billion if they went public or reached AGI. Well, none of those, none of those, neither of those things happened, of course, but they still gave them the $35 billion a couple of days ago. And that, and that's crazy. That's a really crazy number, especially because that is, well, let's just go and have a look at these numbers from Ross Sandler at Barclays. That is, so $35 billion is roughly, oh, let's see.

• 28:15Speaker 07

  Yeah, it's a little bit, it's around how much AI revenue Amazon has made this year. So 41.9%. Actually, yeah, yeah, it's a $3.4 billion less, sorry, more than Amazon is estimated to make on AI this year in totality, including OpenAI and Anthropic spend. So that's good, just handing themselves money, just handing it to OpenAI and Anthropic so they can hand it back. They already gave $5 billion to Anthropic. They already are on course to give them another 20 billion sometimes this year. Google already gave $10 billion to Anthropic this year, has another 30 billion they owe.

• 28:57Speaker 07

  This is not a real, this is not a real economy.

• 29:01Speaker 08

  It's not real growth.

• 29:02Speaker 07

  No one's actually doing business here. It's just people handing money to each other and being like, yep, look how profitable we are. Even though that does not even, doesn't seem like it's exploding margins either. It doesn't seem like it's having much of an effect at all. But what's really concerning is everyone's excited about these companies because of their cloud growth.

• 29:25Speaker 07

  And it's really beginning to look like most of that revenue growth is coming from this spend.

• 29:30Speaker 08

  Yes.

• 29:30Speaker 07

  Which is terrifying.

• 29:32Speaker 08

  It's, almost all of it is coming from those two companies. Earlier you said that, that them not reporting that their revenue is coming from OpenAI and Anthropic alone, that that is something of a scandal. I think that is just irresponsible. I think of it less of a scandal. The part that I do think is a scandal is the circular financing aspect of it. It's the fact that those two companies are also the two companies in which big tech invested billions and billions of dollars in order to keep them afloat. And that is the only reason why those companies are surviving. Yes, it's Silicon Valley and venture investors, but a lot of that investment is corporate investment coming from big tech. It's coming from Microsoft, it's coming from Google, it's coming from Amazon.

• 30:16Speaker 08

  And so the idea that the largest customers, the customers that are driving the majority of these companies' revenue growth are also the, the companies in which those companies had invested in. That is a very, very obvious conflict of interest, at which point it starts to get into actual scandal territory. I don't think that calling the circular financing epidemic, I don't think calling that a scandal is overkill. I don't think that's a stretch too far. I think it really is a scandal. And I think it's actually shameful, the way Jensen Huang has talked about it, where he was asked this question about the circular deal making. And he said, I don't think it's circular at all. He simply denied it and he didn't come up with an explanation as to why it wasn't circular.

• 31:01Speaker 08

  He didn't come up with any real excuses. He just said, no, that's wrong, BS, I don't like what you're saying. And then he just moved on. And that is a real problem. That's when you start to see that actually these, these executives either are. Either they're just blindly ignoring what is happening, or they are actually lying. I mean, I think that it's reasonable to assume that Jensen Huang told a lie when he said that he didn't think that what they were doing was circular. Just to like, go back to the question of would OpenAI go under? Because that's, that's the real, that's how this goes down.

• 31:38Speaker 07

  Yes, and that's, that is also a point that people are now readily discussing. It's no longer fringe economic theory from a crazy person called Ed. It's now something that people want to discuss and are worried about.

• 31:55Speaker 08

  Yes.

• 31:56Speaker 07

  But it's like, yeah, but they, they discuss it in this way that is like, I don't know, like if a neighborhood restaurant shut down. Like, it's like, oh, you know, Jeff, you know, these things happen. Business is tough. And I, I wish I was kidding, but I've tried to talk to reporters about this and tried to be like, hey, look, this company is really holding up the earth.

• 32:22Speaker 08

  Yeah.

• 32:22Speaker 07

  Like they, they are quite consequential to the future revenues of multiple companies. And they're like, yeah, but you know, there's other demand. And that's the thing, when the big thing that this, that the piece I'm working on will be out by the time this goes out, says is like, yeah, the other problem with 73% or so of AI revenues for Google, Amazon and Microsoft being OpenAI and Anthropic is, and just be clear, this progresses over the years of estimates. It's not like they say, okay, demand will even out. That suggests that there isn't demand for AI. Just writ large, that there is not demand, at least not at the scale that's been promised,

• 33:05Speaker 07

  and definitely not at the scale that will satiate all of these data centers. Like, they get, it's not possible when you look at these numbers, and this is not me just being like, oh, I worked some stuff out with some articles. These are actual financial analysts.

• 33:20Speaker 08

  Yeah. Yeah, these are, yeah.

• 33:23Speaker 07

  It's genuinely terrifying because it's, it's not just how bad it will be. And yes, we'll get back to OpenAI dying in a second. It's the fact that everyone's kind of just looking at it and be like, ah, it's all right.

• 33:35Speaker 08

  So I think, yeah, I think it was really, the actual philosophy was, was revealed in your Bloomberg interview. And, you know, I don't mean this disrespectfully to the interviewer. I thought it was actually a great interview. I thought they did a really good job. But I forget her name, but the interviewer said something, said something quite important to you where she said, I just want to make sure you understand, I just want to make sure we're all on the same page, page here. The people who run these companies are very smart people. And that was the beginning of the question, which would go on to say something like, are you really sure about all of this? And I think that is the hesitancy that you're seeing when you talk to media outlets, when you go to the New York Times.

• 34:20Speaker 08

  And I think that's the hesitancy among all of us, which is that to say that this company might not actually work out, which is not an insane thing to say by any stretch of the imagination, when you look at their financials and when you look at their numbers. But to say that it might not work out is to say that the people who are running that company and who, and the people who are investing in that company aren't the smartest people in the world. And today, that is a bold thing to say. It is a bold thing to say that Satya Nadella might not know what he's doing. It's a bold thing to say that Sam Altman might not know what he's doing. It's a bold thing to say that Mark Zuckerberg might not know what he's doing, which is quite crazy to me, considering that just a few years ago, he spent more than $80 billion

• 35:02Speaker 08

  trying to build the Metaverse, which was a total failure, total dead on arrival. He renamed his company to Meta because he thought that this was the future. He was so, so wrong about that. So the idea that these people can't be wrong, or that they can't spend money incorrectly, or that sometimes they might actually not be great capital allocators, that is total lunacy. It is a total fantasy, but for whatever reason, people don't want to believe that. People get uncomfortable when you start to suggest that. And that, I think, is why people get uncomfortable when you say the things that you say, because it suggests maybe these guys don't know what they're doing.

• 35:44Speaker 07

  Well, it's that and also, let's just, let's just say this right now. I'm looking at the Barclays numbers in front of me. OpenAI dies tomorrow. That is, let's look at it, 28% of Amazon's AI revenue next year. Gone. Goodbye, just, just evaporated. And indeed, 27% for the next two years as well. If Anthropic and OpenAI, if one of them dies, what, that's like 20%, let's see. OpenAI is a, well, it looks like about $12.5 billion of Google's 2027 AI revenue. Just like gone, evaporated. And otherwise, their other AI revenues are pretty flat. It looks like Vertex, Vertex kind of increases, but again, that's through selling Anthropic and OpenAI's models.

• 36:30Speaker 07

  It's, I don't think people realize that there's a great chart that's coming in this article as well. How much of Azure's revenue as well is just OpenAI's spend? And it's, let's see, let's take, let's take a look at this chart of Azure revenue as well. 62%, let's see. Yeah, it's about 72%, 68 to 72% in fiscal year 2026, and as much as 74% in 2027. If these companies die, they lose most of their AI revenue, evaporated. And that's not including the amount of money that comes through Azure AI renting out their models.

• 37:05Speaker 08

  Yeah.

• 37:05Speaker 07

  Like, and people are just like, yeah, you know, if that happens, there'll be more demand. I have this guy who's a very well-meaning guy, he's on Twitter, he's a, he's a semiconductor analyst. He always responds and say, look, all useful compute will be bought. All useful compute will be bought. It will always be bought. And I'm like, yeah, but if OpenAI dies, it's the largest consumer of AI compute, what happens to that? Well, it'll get bought.

• 37:27Speaker 08

  Yeah.

• 37:28Speaker 07

  And it's just insane to me. It is genuinely bonkers to me that no one, like, I guess, I guess what it is, taking a step back, is looking at what you said as well, is it's, they don't want to follow the argument to the logical endpoint, because it's all of these smart people were stupid.

• 37:46Speaker 08

  That's right.

• 37:48Speaker 07

  And also, everyone was wrong, wrong in a way that is going to be very difficult to back out of.

• 37:54Speaker 08

  That's right.

• 37:55Speaker 07

  And also, that we, they were lied to. Just, let's be clear.

• 38:00Speaker 08

  Yeah, that, that's, that's the problem. Now, so I'm in total agreement with you on all this. I want to take things to their logical conclusion further, and I'm going to say some, but I don't know if you're going to be that excited about what I'm going to say.

• 38:15Speaker 07

  That's fine.

• 38:15Speaker 08

  Because my, when I think about this, what would actually happen if AI were to basically just die? If OpenAI actually died, and if Anthropic actually died? And I think there's good reason to believe that, which we can get into, we can get into their financials and just rehash them, because they are very important, they're systemic to the ecosystem. But I sometimes like to think, okay, what, what would a world look like where the AI thing just didn't work out? And I have to say, a lot of that anxiety actually is priced in right now when it comes to big tech. And I just want to point you to the price to earnings multiples. Yes. The price to earnings multiples of big tech at the beginning of 2023, I went back and

• 38:59Speaker 08

  looked at this, this was right before the AI trade took off. If you look at the price to earnings multiples, you look at Microsoft, it was trading at 26 times earnings. Amazon was trading at 80 times earnings. Meta was trading at 31 times earnings. If you look at the PE multiples today, and by the way, I looked at this as of last week, at the end of last week, right after they reported their earnings. So they, they could have changed by now, I'm sure they have. Microsoft's multiple is lower than it was, is it 25? Not that much lower, but it is lower. Amazon is, Amazon's is significantly lower, and this is the real PE, the one that I adjusted, not factoring in that, their investment gains on their, on their Anthropic and OpenAI stakes. It's trading at 30 times earnings, that's lower.

• 39:43Speaker 08

  And Meta's is significantly lower, it's trading at 20 times earnings compared to 31 before the AI boom. So I think one thing that we should recognize is that in some places, in some areas of the market, I think there are people on Wall Street who are actually quite anxious. I think there are a lot of people on Wall Street, Ed, who are reading your newsletter. I, I truly believe that. And I think that that perspective, the bearish perspective, and the acknowledgement of how this could all implode, I don't think that it is completely driving the market. I think there's more optimism than there is pessimism. But I do think that it is somewhat being reflected.

• 40:24Speaker 08

  And that is to say, if this all were to blow up, I don't think these stocks wouldn't crash. They would certainly crash. But I do think that it wouldn't be as horrible as it might have been, say, in 2008, when the housing bubble was truly elusive to almost everyone. That is my conjecture, and I'm sure you might disagree with me on it, but I do think we should, we should recognize the extent to which there is some anxiety that is beginning to be reflected in some asset prices.

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• 43:26Speaker 07

  So, one pushback. Yeah. And I think it's a critical one. Is that even though the price through earnings and all that reflects a little bit lower and it's showing some anxiety, it still is a price factored into the, which factors in the idea that these companies will keep growing. Yes. And I think that that is a critical problem because I'm not sure, at least in the case of their cloud businesses, whether these companies are growing anymore when you remove OpenAI and Anthropic. And I don't think it, like, I'm not just talking, like, I don't think Microsoft, Google, Amazon, and Meta, though I think Meta could die in 10 years. I've thought that for a while. I think that they're just, it's falling apart. But I don't think they're dying. I think their stocks are going to get their asses beat.

• 44:10Speaker 07

  But the problem is going to be not just that AI didn't work. That's what's going to be the first problem. The second one is when they go, right, well, OpenAI isn't paying you anymore and suddenly your revenues are down. And your growth has slowed. Hey, Google Cloud has stopped growing. It's stopped growing pretty much at all. It's, in fact, looks kind of flat. What's the deal with that? And it's because Anthropic and OpenAI's compute spend was propping up the growth. So while Wall Street might be saying, oh, well, if AI doesn't work out, I think what they mean is that they think AI won't work out and be the next big thing,

• 44:54Speaker 07

  but there will still be big revenue generating businesses from this, which is not the case. I went and looked at the Wells Fargo estimates from Turin. And what's interesting for Microsoft is that in fiscal year 2027, so next year, they estimate that Microsoft 365 Copilot will make $10 billion a year in annual revenue, which is pathetic. Yeah. That's like a, what, like a third of Intelligent Cloud? It's, I mean, it's a little bit less than they estimate the Azure AI will make, and which is predominantly made up of selling OpenAI's models.

• 45:32Speaker 08

  I mean, they said, one of their bragging points on that earnings call was that they have 30 million copilot, paying copilot users. But what they don't really talk about is the fact that that's part of a larger enterprise bundle, which only makes up about 8% of their total Microsoft 365 subscribers. So basically what they're telling us, that they're trying to brag, but ultimately I read that and I go, oh, so you only converted 8% of your user base? That was, that was the share of your users who are down to try this AI product that you say is going to change the world. So to that point, I don't think that the strength that they are projecting in their consumer AI business is anywhere near what they'd like us to believe.

• 46:17Speaker 07

  Well, on top of that, the Wells Fargo estimates, estimates, estimates, someone will get me on that one in the comments. They only estimate that they made $3.85 billion for the entire fiscal year 2026 from 365 Copilot, you know, the thing with 30 million paid seats. They're discounting this to Timbuktu. Like, this is, this is being, they're discounting it to hell. And I mean, pretty much anything, like, pretty much anything that Microsoft sells has discounts, especially when it comes to Microsoft 365. But again, the hogs lapped it up. They love their slop. They love being given a new big number so that they can interpret it.

• 46:59Speaker 07

  When they, again, not really sure what these analysts were doing because, I don't know, again, I think I've said this already, like, if I was working at Wells Fargo and I had these numbers, I would be calling my boss's boss. I'd be like, hey, guys, hi, we have a problem. Because like I said earlier, it's not just that Microsoft, Google, and Amazon have pathetic AI revenues outside of OpenAI and Anthropic. It's that if they have pathetic revenues, if they, as the largest holders of AI compute, as with the ones with the best pricing power, with the best teams ostensibly, with the most experience building AI data centers and providing AI compute,

• 47:40Speaker 07

  if they can barely scrape together, what, like, what, like, let's see, so it's 70, like, 73, 74% of their revenue? So like, they have this meager little shrivel of their AI revenues is from diverse revenue. If that's the case, then there is not demand for AI compute. It's not that there's only a little. It means there's none. It means there's actually, like, there is a couple billion. Because again, when you look at the other providers, Core Wave, who are their biggest customers? Anthropic, Meta, and OpenAI. Who's Iron's biggest customer? Microsoft. Nebius, Microsoft. What's Microsoft doing with AI? Not very much. Not actually very much at all.

• 48:22Speaker 07

  They are providing compute to OpenAI and conning people into buying Copilot. Yeah. Like, it's just, it's astonishing because this is bigger than them. It's bigger than them. It's the 190 gigawatts of planned data center capacity. It's all of these data centers being built everywhere. I, like, I'm stuttering because it's like, the ramifications of this are everything I've kind of feared, which is that AI demand does not exist at scale and most of these data centers don't go paid for. And that's even if Anthropic and OpenAI, like, succeed in surviving past 2027.

• 49:00Speaker 08

  Well, I think you said something important earlier about the growth. And that is if, if this AI thing doesn't work out, it's not as if Microsoft and Amazon and Google and Meta won't have a business anymore. They had a business before AI and the business was pretty big and doing pretty well. What it does mean is that these companies won't actually be growing anymore. They won't be growth companies. And I think this gets to the heart of what AI has been all about. And that is that the big tech companies in late 2022, when ChatGPT was released to the world,

• 49:42Speaker 08

  they suddenly realized, oh, my gosh, innovation is happening without us. There are other companies on the scene. There are other technologies and we don't have a part in it. And so they decided, okay, what are we going to do? We're going to do whatever we can to take whatever semblance of technology exists in that company and then bolt it onto our own companies. We're basically going to inject that optimism into our own faces as if it were Botox to convince the market that we are in fact young again, that we are growing, that we're hot, that we're innovative, and that you should come and put your money in us. Because we're not just a company that's going to continue to generate cash. We're a company, we're a generational company.

• 50:25Speaker 08

  We're a company that's going to significantly increase profits at an exponential rate over 10, 20, 30 years. That is the story that they wanted to tell the markets. And they wanted to tell it so desperately that they were willing to actually go and invest in those companies like OpenAI and Anthropic and also SpaceX, which we haven't mentioned that much, but it actually plays a role in all this.

• 50:48Speaker 07

  Yeah.

• 50:49Speaker 08

  And then have those companies come back and then, and then buy our chips, give us back the money, and then we're going to use that and use that as a story to tell the world that actually we're young again, that we are growing.

• 51:01Speaker 07

  And convince everyone by proxy to spend money on AI compute, to compete with our, to compete with us in, with the companies that we invest in.

• 51:10Speaker 08

  We will obliterate our balance sheets in the process. And that's, that's where things are going to get really ugly. The companies that really start to lose cash and we're starting to see it. Amazon, negative free cash flow. Google, negative free cash flow as of this quarter. But that's really what they're doing here. They want to be young again. But if you look at these companies, these companies are old. These are mature companies. Their heyday is behind them. But they don't want to believe that. They want to live forever. They are the Brian Johnsons of the world of technology. And so I think what's going to happen. If this thing doesn't work out, I think there's a high likelihood that it won't because

• 51:54Speaker 08

  of the financials of OpenAI and Anthropic and how dependent the whole world has become on them. I think what will happen is the companies won't go under, the big tech companies. I think what will happen is Wall Street will look at them and they'll say, you're not a growth company, you're a mature company. And that means that we're going to assign a mature multiple to your earnings. We're not going to have the days of, I think that'll look like something in the range of 15 to 20 times earnings. So that's why, by the way, Meta, I'm not so worried about because Meta is actually in that range. I think if you look at the company, I think Wall Street is looking at it and saying, this is a company whose growth prospects are unlikely at best. So I'm not so worried about Meta.

• 52:37Speaker 08

  The companies I'm more worried about is a company like Google, trading above 30 times earnings. By the way, a company that's gotten way out over its skis from a multiple perspective, which is really surprising to me, is Apple. And I think that's because people have actually gotten nervous about the AI trade. And so they said, okay, Amazon still has cash on the balance sheet. Apple's trading at nearly 40 times earnings. The way that they have been able to dupe the market into thinking that they are a growth company, when they haven't come out with a new product in 10 years and the ones that they've tried to come out with and tried to sell have completely flopped. They canceled the Apple car, the Vision Pro was a total disaster. I mean, that's, that's very clearly not a growth company. But I think that's the question.

• 53:20Speaker 07

  Funny thing is with Apple as well is the, they've managed to keep going by just not blinking on the AI trade, except the AI trade fucked them over because of the increasing cost of RAM.

• 53:32Speaker 08

  Right.

• 53:32Speaker 07

  Because of everyone buying into, I mean, that's the other thing. It's like the increasing, this is the other, so actually, this is a good bridge from what you were just saying. The other problem with this as well is, yeah, you're saying these companies will be assigned growth, like the multiples associated with old, old boring companies, right?

• 53:50Speaker 08

  Boring, old, mature.

• 53:52Speaker 07

  But again, I don't think that factors in, A, the fact they're not growing, but B, the fact that they have hundreds of billions of assets now. They're just burdened with debt, endless debt. Microsoft has been kind of smart in the amount of debt it's taken on. It's nowhere near as encumbered, but who knows at this point? Like, Google's done a massive equity sale, or they plan to do a massive equity sale.

• 54:16Speaker 08

  The more on tilt they get in order to pursue this Botox future of being young again, the more dangerous.

• 54:24Speaker 07

  You've got to write that out.

• 54:26Speaker 08

  The more dangerous that, the larger the threat to their entire existence becomes. So I will agree with you. If they continue down this road of, I'm not just going to pay for the Botox with the cash that I already have in my bank account, I'm going to take on significant amounts of debt, significant amounts of leverage and margin in order to pursue that dream because I'm so obsessed with pursuing it and I need to do it because I have to be young again. If they take that to its end, to its logical conclusion, as you say, then yeah, we can start talking about, will these companies implode? And I think Oracle is an example of a company where they have done that. They have genuinely done that and its prospects are genuinely terrifying. We're starting to see it with some of these other companies.

• 55:11Speaker 08

  We're starting to, I was shocked that Google was willing to come out with a quarter of negative free cash flows. I was shocked that Amazon was willing to do that. So it does appear that they're starting to lose their marbles on this front. They're so obsessed with the mission, they're so obsessed with the AI future that they are actually acting irresponsibly. But I don't think that we're quite there yet. I think the signs show that they're going to continue to do this. I mean, if they continue to load up their balance sheets with debt, who knows what the future will actually look like?

• 55:42Speaker 07

  But this is.

• 55:42Speaker 08

  So far, they're, they're not quite in a place where they're, they're fully going to collapse and implode would be my read of the situation at present.

• 55:53Speaker 07

  I fully agree. By the way, I don't actually think the big three collapse. I think Meta is already on the down spiral. I think they really, I think their product is collapsing and the things that I continually hear from that company suggests that like, the culture is screwed. But nevertheless, for the short term, at least next five years, I think that they will be fine. They're not going to have a fun time of it when this ends. Again, when it comes to like logical endpoints and the way that people don't want to discuss them, Oracle is now spending all of its revenue, just more and more than its revenue on, on AI capex just for OpenAI. And I mean, the New York Times just, just fucking ripped me off, by the way.

• 56:35Speaker 07

  Like there is a sentence in there about fallen angels that is like bordering on identical to my piece. Fucking New York Times, man. If you're listening from the Times, go read the Oracle piece, go read my fallen angel bit from the OpenAI bubble, you tell me if I'm crazy. But nevertheless, people are having this conversation like, wow, Oracle, they're kind of unprofitable. That's not good. Wow, that's not good. But then they stop short of saying the thing that they don't want to say, much like everyone else. And I want to talk about this bit, which is, yeah, if Oracle doesn't work out the AI trade, it dies.

• 57:08Speaker 08

  Yes.

• 57:09Speaker 07

  Its revenue has been flat for 15 years, adjusted for inflation. It has, the crazy thing is, I wrote about this a couple of weeks ago, the crazy thing about Oracle is that they actually would be on the decline already, but whenever they slow down, they buy more companies, they just acquire companies. They're like, they're really strange.

• 57:26Speaker 08

  Yeah.

• 57:27Speaker 07

  But nevertheless, no one wants to talk about the fact that Oracle will die. And honestly, seeing these numbers, yeah, Oracle will die.

• 57:34Speaker 08

  It's, it is a, it is a genuinely, it is a genuine possibility. It's, it's not overhyped, it's not dumerism, it's, it's, it could genuinely happen. I think we should give credit to one group of people who actually do seem to be pricing in that possibility, and that is the credit default swap traders.

• 57:55Speaker 07

  Oh, yeah.

• 57:55Speaker 08

  Whichever ones have driven those CDSs up to where they are, I don't know where they are.

• 57:59Speaker 07

  And that's just for the listeners, that's just betting on whether Oracle will die.

• 58:03Speaker 08

  That's betting on it dying.

• 58:05Speaker 07

  Specifically betting on whether it will default, default on its debts.

• 58:08Speaker 08

  Yes. Whether it was, it's the insurance that you pay on the, on the possibility that it will default. And the price of that insurance is going up. People are beginning to realize in that market specifically, that the possibility is real, that it could actually happen. And I, I mean, I think there's a question as to, again, whether they're too late on that. Weren't the signs there before? Couldn't we have started to see this coming, not today, but six to 12 to 18 months ago? And I think that would be the contention of your readers and your listeners who have been hearing about this from you for a very long time. And then suddenly everyone decides, oh, maybe it's a problem. Maybe we'll start to write some articles on this.

• 58:53Speaker 08

  Maybe we'll start to see those spreads widening on the CDS swaps. But we should give it, give them their props, you know? Some investors seem to be acknowledging the situation.

• 59:05Speaker 07

  Yeah. It, well, you know what, Ed? I think that's actually a good spot to end it. People can find you on Prof G Markets, what you're working on at the moment, you, because you should write up that Botox thing. That's incredible. It's an incredible idea. It's a banger. Please run with it. What else are you working on?

• 59:22Speaker 08

  That'll be my next newsletter. Let's see, I'm working on a newsletter where we're talking about what happened in South Korea last week. That'll go out on Tuesday of this week. So that's tomorrow. I don't know when this episode will come out, but if you want to come, follow my work, go to Prof G Markets, we're on YouTube. I cover the markets every single day of the week, or at least Monday through Friday. And we talk about everything. We have people on from all walks of life, from different sides of the market. We try to have bulls on, we try to have bears on, and we'll certainly be having Ed Zitron on in the future as well, because we love him and we love his analysis.

• 59:56Speaker 07

  We love the Eds. All right, you'll find me on the monologue this week as well. Haven't worked out what it's going to be, it'll probably be about this. Thank you as ever for listening. Subscribe to the newsletter premium as well as my main source, along with the podcast. I love you all. Thank you for listening.

• 1:00:19Speaker 07

  Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Osowski. You can check out more of his music and audio projects at mattosowski.com, M A T T O S O W S K I dot com. You can email me at [email protected] or visit betteroffline.com to find more podcast links and of course, my newsletter. I also really recommend you go to chat dot where's your ed dot app to visit the Discord and go to r slash better offline to check out our Reddit. Thank you so much for listening.

• 1:00:51Speaker 06

  Better Offline is a production of Cool Zone Media. For more from Cool Zone Media, visit our website, coolzonemedia.com or check us out on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

• 1:01:24Speaker 17

  I'll admit it, I'm one of those people who gets excited for football season way before the first kickoff. That's why a trip to Total Wine & More has become part of my game day routine. I can get the cooler ready with my favorite beers and ready to drink cocktails. I'm usually picking up enough for everybody, so it's nice knowing I'm scoring the lowest prices. This season, make Total Wine & More part of your game day tradition. Spirits are not sold in Virginia and North Carolina. Drink responsibly. B21.

• 1:01:54Speaker 18

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• 1:02:28Speaker 19

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• 1:02:38Speaker 20

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• 1:02:43Speaker 21

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• 1:03:19Speaker 10

  This is an iHeart Podcast. Guaranteed Human.